SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period June 30, 2002
Commission file number 1-3919
Keystone Consolidated Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 37-0364250
(State or other jurisdiction of I.R.S. Employer
incorporation or organization)Identification No.)
5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, TX 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 458-0028
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
Number of shares of common stock outstanding at August 14, 2002: 10,068,450
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2001
and June 30, 2002 3-4
Consolidated Statements of Operations - Three months
and six months ended June 30, 2001 and 2002 5-6
Consolidated Statements of Cash Flows - Six months
ended June 30, 2001 and 2002 7
Consolidated Statement of Common Stockholders'
Equity (Deficit) - Six months ended June 30, 2002 8
Notes to Consolidated Financial Statements 9-20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21-28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 29
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, June 30,
ASSETS 2001 2002
-------- -------
Current assets:
Notes and accounts receivable .................. $ 29,411 $ 43,693
Inventories .................................... 40,912 37,805
Deferred income taxes .......................... 9,778 --
Prepaid expenses and other ..................... 3,211 2,343
-------- --------
Total current assets ........................ 83,312 83,841
-------- --------
Property, plant and equipment .................... 367,556 370,115
Less accumulated depreciation .................... 237,956 246,229
-------- --------
Net property, plant and equipment ........... 129,600 123,886
-------- --------
Other assets:
Restricted investments ......................... 5,675 5,777
Prepaid pension cost ........................... 131,985 133,485
Deferred income taxes .......................... 11,844 --
Deferred financing costs ....................... 2,295 2,717
Goodwill ....................................... 752 752
Other .......................................... 1,437 1,292
-------- --------
Total other assets .......................... 153,988 144,023
-------- --------
$366,900 $351,750
======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) December 31, June 30,
2001 2002
-------- -------
Current liabilities:
Notes payable and current maturities of
long-term debt ............................... $ 46,332 $ 32,399
Accounts payable ............................... 23,014 23,079
Payables to affiliates ......................... 633 946
Accrued OPEB cost .............................. 7,215 7,215
Accrued preferred stock dividends .............. -- 1,713
Other accrued liabilities ...................... 37,100 42,101
--------- ---------
Total current liabilities .................. 114,294 107,453
--------- ---------
Noncurrent liabilities:
Long-term debt ................................. 100,123 64,364
Accrued OPEB cost .............................. 101,810 104,002
Negative goodwill .............................. 19,998 --
Other .......................................... 31,010 21,573
--------- ---------
Total noncurrent liabilities ............... 252,941 189,939
--------- ---------
Minority interest ................................ 1 274
--------- ---------
Redeemable Series A preferred stock .............. -- 2,112
--------- ---------
Common stockholders' equity (deficit):
Common stock ................................... 10,792 10,798
Additional paid-in capital ..................... 53,071 51,358
Accumulated deficit ............................ (64,187) (10,172)
Treasury stock, at cost ........................ (12) (12)
--------- ---------
Total stockholders' equity (deficit) ....... (336) 51,972
--------- ---------
$ 366,900 $ 351,750
========= =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
--------------------- ------------------------
2001 2002 2001 2002
---- ---- ---- ----
Revenues and other income:
Net sales ........................ $ 86,294 $ 94,244 $ 164,057 $ 180,156
Gain on early extinguishment of
debt ............................ -- -- -- 54,739
Interest ......................... 53 21 124 41
Other, net ....................... 418 36 495 37
-------- --------- --------- ---------
86,765 94,301 164,676 234,973
-------- --------- --------- ---------
Costs and expenses:
Cost of goods sold ............... 80,461 83,433 156,818 160,612
Selling .......................... 1,668 1,735 3,275 3,574
General and administrative ....... 4,531 6,812 7,817 12,727
Overfunded defined benefit pension
credit .......................... (750) (750) (1,500) (1,500)
Interest ......................... 3,601 953 7,347 3,647
-------- --------- --------- ---------
89,511 92,183 173,757 179,060
-------- --------- --------- ---------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle ......... (2,746) 2,118 (9,081) 55,913
Income tax expense (benefit) ....... (1,276) -- (3,912) 21,622
Minority interest in after-tax
earnings ......................... 158 114 165 274
-------- --------- --------- ---------
Income (loss) before cumulative
effect of change in accounting
principle ......................... (1,628) 2,004 (5,334) 34,017
Cumulative effect of change in
accounting principle .............. -- -- -- 19,998
-------- --------- --------- ---------
Net income (loss) ............... (1,628) 2,004 (5,334) 54,015
Dividends on preferred stock ....... -- 1,713 -- 1,713
-------- --------- --------- ---------
Net income (loss) available for
common shares ..................... $ (1,628) $ 291 $ (5,334) $ 52,302
======== ========= ========= =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------------- ----------------------
2001 2002 2001 2002
---- ---- ---- ----
Basic earnings (loss) per share
available for common shares:
Income (loss) before cumulative
effect of change in accounting
principle .................... $ (.16) $ .03 $ (.53) $ 3.21
Cumulative effect of change in
accounting principle ......... -- -- -- 1.99
---------- ---------- ---------- ----------
Net income (loss) ........... $ (.16) $ .03 $ (.53) $ 5.20
========== ========== ========== ==========
Basic shares
Outstanding .................... 10,062 10,068 10,062 10,066
========== ========== ========== ==========
Diluted earnings (loss) per share
available for common shares:
Income (loss) before cumulative
effect of change in accounting
principle .................... $ (.16) $ .03 $ (.53) $ 1.94
Cumulative effect of change in
accounting principle ......... -- -- -- 1.14
---------- ---------- ---------- ----------
Net income (loss) ........... $ (.16) $ .03 $ (.53) $ 3.08
========== ========== ========== ==========
Diluted shares outstanding ...... 10,062 10,068 10,062 17,491
========== ========== ========== ==========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended
June 30,
2001 2002
---- ----
Cash flows from operating activities:
Net income (loss) .................................... $ (5,334) $ 54,015
Depreciation and amortization ........................ 8,599 8,931
Amortization of deferred financing costs ............. 239 334
Deferred income taxes ................................ (3,976) 21,622
Non-cash OPEB expense ................................ (424) 2,192
Gain on early extinguishment of debt ................. -- (54,739)
Cumulative effect of change in accounting principle .. -- (19,998)
Other, net ........................................... 278 124
Change in assets and liabilities:
Notes and accounts receivable ...................... (20,773) (15,369)
Inventories ........................................ 8,121 3,107
Prepaid pension cost ............................... (1,500) (1,500)
Accounts payable ................................... 7,691 378
Other, net ......................................... (230) 6,452
-------- --------
Net cash provided (used) by operating activities . (7,309) 5,549
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (1,535) (3,271)
Proceeds from sale of business unit .................. 757 --
Collection of notes receivable ....................... 726 1,127
Other, net ........................................... 165 273
-------- --------
Net cash provided (used) by investing activities . 113 (1,871)
-------- --------
Cash flows from financing activities:
Revolving credit facilities, net ..................... 7,636 (15,980)
Other notes payable and long-term debt:
Additions .......................................... -- 15,066
Principal payments ................................. (425) (299)
Deferred financing costs paid ...................... (15) (2,465)
-------- --------
Net cash provided (used) by financing activities . 7,196 (3,678)
-------- --------
Net change in cash and cash equivalents ................ -- --
Cash and cash equivalents, beginning of period ......... -- --
-------- --------
Cash and cash equivalents, end of period ............... $ -- $ --
======== ========
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized ................ $ 7,117 $ 1,835
Income taxes (refund received) ..................... (158) 108
Note received in connection with sale of
business unit ....................................... $ 440 $ --
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Six months ended June 30, 2002
(In thousands)
Additional
Common paid-in Accumulated Treasury
Stock capital deficit stock Total
Balance - December 31, 2001 $10,792 $ 53,071 $(64,187) $ (12) $ (336)
Net income ................ -- -- 54,015 -- 54,015
Issuance of common stock .. 6 -- -- -- 6
Preferred stock dividends . -- (1,713) -- -- (1,713)
------- -------- -------- ------- --------
Balance - June 30, 2002 ... $10,798 $ 51,358 $(10,172) $ (12) $ 51,972
======= ======== ======== ======= ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
The consolidated balance sheet of Keystone Consolidated Industries, Inc.
("Keystone" or the "Company") at December 31, 2001 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2002 and the consolidated statements of
operations and cash flows for the interim periods ended June 30, 2001 and 2002,
and the consolidated statement of common stockholders' equity (deficit) for the
interim period ended June 30, 2002, have each been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary to present fairly the consolidated
financial position, results of operations and cash flows, have been made.
However, it should be understood that accounting measurements at interim dates
may be less precise than at year end. The results of operations for the interim
periods are not necessarily indicative of the operating results for a full year
or of future operations.
Certain information normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America has been condensed or omitted. The accompanying consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 (the "Annual Report").
At June 30, 2002, Contran Corporation ("Contran") and other entities
related to Mr. Harold C. Simmons, beneficially owned approximately 50% of the
Company. Substantially all of Contran's outstanding voting stock is held by
trusts established for the benefit of certain children and grandchildren of Mr.
Simmons, of which Mr. Simmons is sole trustee. Keystone may be deemed to be
controlled by Contran and Mr. Simmons.
Note 2 - Inventories:
Inventories are stated at the lower of cost or market. At December 31, 2001
and June 30, 2002, the last-in, first-out ("LIFO") method was used to determine
the cost of approximately 74% and 71% respectively, of total inventories and the
first-in, first-out or average cost methods were used to determine the cost of
other inventories.
December 31, June 30,
2001 2002
-------- -------
(In thousands)
Steel and wire products:
Raw materials .................................... $ 9,818 $ 7,963
Work in process .................................. 9,912 9,383
Finished goods ................................... 16,132 14,803
Supplies ......................................... 13,446 13,852
------- -------
49,308 46,001
Less LIFO reserve ................................ 10,768 10,768
------- -------
38,540 35,233
Lawn and garden products - finished goods .......... 2,372 2,572
------- -------
$40,912 $37,805
======= =======
Note 3 - Notes payable and long-term debt:
December 31, June 30,
2001 2002
-------- -------
(In thousands)
Revolving credit facilities:
Keystone .................................. $ 40,823 $26,197
EWP ....................................... 3,225 2,541
Garden Zone ............................... 1,738 1,068
8% Notes .................................... -- 29,304
6% Notes .................................... -- 16,031
9 5/8% Notes ................................ 100,000 6,150
Keystone Term Loan .......................... -- 4,791
County Term Loan ............................ -- 10,000
Other ....................................... 669 681
-------- -------
146,455 96,763
Less current maturities ................... 46,332 32,399
-------- -------
$100,123 $64,364
======== =======
During March 2002, Keystone completed an exchange offer (the "Exchange
Offer") with respect to its 9 5/8% Notes pursuant to which, among other things,
holders of $93.9 million principal amount of the 9 5/8% Notes exchanged their 9
5/8% Notes (along with accrued interest of approximately $10.1 million through
the date of exchange, including $2.1 million which accrued during the first
quarter of 2002) for various forms of consideration, including newly-issued debt
and equity securities of the Company, as described below, and such 9 5/8% Notes
were retired:
o $79.2 million principal amount of 9 5/8% Notes were exchanged for (i) $19.8
million principal amount of 8% Subordinated Secured Notes due 2009 (the "8%
Notes") and (ii) 59,399 shares of the Company's Series A 10% Convertible
Pay-In-Kind Preferred Stock,
o $14.5 million principal amount of 9 5/8% Notes were exchanged for $14.5
million principal amount of 6% Subordinated Unsecured Notes due 2011 (the
"6% Notes"), and
o $175,000 principal amount of 9 5/8% Notes were exchanged for $36,000 in
cash and 6,481 shares of Keystone common stock.
As a result of the Exchange Offer, the collateral previously securing the 9
5/8% Notes was released, and the 9 5/8% Note indenture was amended to eliminate
substantially all covenants related to the 9 5/8% Notes, including all
financial-related covenants.
The 8% Notes bear simple interest at 8% per annum, one-half of which will
be paid in cash on a semi-annual basis and one-half will be deferred and be paid
together with the principal in three installments, one-third in each of March
2007, 2008 and 2009. The 8% Notes are collateralized by a second-priority lien
on substantially all of the existing fixed and intangible assets of the Company
and its subsidiaries (excluding EWP and Garden Zone LLC ("Garden Zone")), other
than the real property and other fixed assets comprising Keystone's steel mill
in Peoria, Illinois, on which there is a third-priority lien. Keystone may
redeem the 8% Notes, at its option, in whole or in part at any time with no
prepayment penalty. The 8% Notes are subordinated to all existing senior
indebtedness of Keystone, including, without limitation, the revolving credit
facilities of Keystone, EWP and Garden Zone, the Keystone Term Loan (as defined
below) and, to the extent of the Company's steel mill in Peoria, Illinois, the
County Term Loan (as defined below). The 8% Notes rank senior to any expressly
subordinated indebtedness of Keystone, including the 6% Notes.
The 6% Notes bear simple interest at 6% per annum, of which one-fourth will
be paid in cash on a semi-annual basis and three-fourths will accrue and be paid
together with the principal in four installments, one-fourth in each of March
2009, 2010, 2011 and May 2011. Keystone may redeem the 6% Notes, at its option,
in whole or in part at any time with no prepayment penalty. The 6% Notes are
subordinated to all existing and future senior or secured indebtedness of the
Company, including, without limitation, the revolving credit facilities of
Keystone, EWP and Garden Zone, the Keystone Term Loan (as defined below), the
County Term Loan (as defined below), the 8% Notes and any other future
indebtedness of the Company which is not expressly subordinated to the 6% Notes.
Keystone accounted for the 9 5/8% Notes retired in the Exchange Offer in
accordance with SFAS No. 15, Accounting by Debtors and Creditors for Troubled
Debt Restructurings. In accordance with SFAS No. 15:
o The 6,481 shares of Keystone common stock were recorded at their aggregate
fair value at issuance of $7,000 based on the quoted market price for
Keystone common stock on the date of exchange,
o The 59,399 shares of Series A preferred stock were recorded at their
aggregate estimated fair value at issuance of $2.1 million,
o The 8% Notes were recorded at their aggregate undiscounted future cash
flows (both principal and interest) of $29.3 million, and thereafter both
principal and interest payments will be accounted for as a reduction of the
carrying amount of the debt, and no interest expense will be recognized,
and
o The 6% Notes were recorded at the $16.0 million carrying amount of the
associated 9 5/8% Notes (both principal and interest), and future interest
expense on such debt will be recognized on the effective interest method at
a rate of 3.8%.
As a result, for financial reporting purposes the Company reported a $54.7
million pre-tax gain ($33.1 million net of income taxes) in the first quarter of
2002 related to the exchange of the 9 5/8% Notes. Because of differences between
the income tax treatment and the financial reporting treatment of the exchange,
the Company reported $65.8 million of income for federal income tax purposes
resulting from the exchange. However, all of the taxable income generated from
the exchange was offset by utilization of the Company's net operating loss
carryforwards, and no cash income tax payments were required to be paid as a
result of the exchange.
As part of its efforts to restructure the 9 5/8% Notes, in April 2002
Keystone received a new $10 million term loan from the County of Peoria,
Illinois (the "County Term Loan"), and a new $5 million term loan (the "Keystone
Term Loan") from the same lender providing the Keystone revolving credit
facility. The County Term Loan does not bear interest, requires no amortization
of principal and is due in 2007. The Keystone Term Loan bears interest at prime
plus .5% or LIBOR plus 2.5% at the Company's option, with principal payments
amortized over a four-year period and due in March 2005. The County Term Loan is
collateralized by a second priority lien on the real property and other fixed
assets comprising Keystone's steel mill in Peoria, Illinois. The Keystone Term
Loan is collateralized by a first-priority lien on all of the fixed assets of
the Company and its subsidiaries, other than EWP and Garden Zone. Proceeds from
the Keystone Term Loan and County Term Loan were used by Keystone to reduce the
outstanding balance of Keystone's revolving credit facility. During April 2002,
the Company also extended Keystone's revolving credit facility through March
2005 under substantially the same terms as the existing facility. In June 2002,
the EWP Revolver was extended through June 2004 and in July 2002, the Garden
Zone Revolver was extended through April 2003, both under the same terms as the
existing facilities.
In addition, a wholly-owned subsidiary of Contran has agreed to loan the
Company up to an aggregate of $6 million under the terms of a revolving credit
facility that matures on December 31, 2002. This facility is collateralized by
the common stock of EWP owned by Keystone. Through August 14, 2002, the Company
has not borrowed any amounts under such facility.
Note 4 - Redeemable Series A preferred stock:
In connection with the Exchange Offer, Keystone issued 59,399 shares of
Series A 10% Cumulative Convertible Pay-In-Kind Preferred Stock (the "Series A
Preferred Stock"). The Series A Preferred Stock has a stated value of $1,000 per
share and has a liquidation preference of $1,000 per share plus accrued and
unpaid dividends. The Series A Preferred Stock has an annual dividend commencing
in December 2002 of $100 per share, and such dividends may be paid in cash or,
at the Company's option, in whole or in part in new Series A Preferred Stock
based on their stated value. The amount of dividends accrued at June 30, 2002
($1.7 million) has been determined based on the assumption such dividends will
be paid in cash rather than in the form of additional shares of Series A
Preferred Stock. After March 2003, the Series A Preferred Stock may be converted
into shares of Keystone common stock at the exchange rate of $4.00 per share,
and holders of the Series A Preferred Stock will be entitled to vote on any
matter brought before Keystone shareholders on an as-converted basis, voting
together with Keystone common shareholders as a single class. The Company may
redeem the Series A Preferred Stock at any time, in whole or in part, at a
redemption price of $1,000 per share plus accrued and unpaid dividends. In
addition, in the event of certain sales of the Company's assets outside the
ordinary course of business, the Company will be required to offer to purchase a
specified portion of the Series A Preferred Stock, at a purchase price of $1,000
per share plus accrued and unpaid dividends, based upon the proceeds to the
Company from such asset sale. Otherwise, holders of the Series A Preferred Stock
have no mandatory redemption rights. The Company does not currently believe it
is probable that holders of the Series A Preferred Stock will be able to require
the Company to purchase any of their stock, and accordingly the Company is not
accreting the Series A Preferred Stock up to its redemption value.
Note 5 - Income taxes:
At June 30, 2002, the Company expects that its long-term profitability
should ultimately be sufficient to enable it to realize full benefit of its
future tax attributes. However, considering all factors believed to be relevant,
including the Company's recent operating results, its expected future near-term
productivity rates; cost of raw materials, electricity, labor and employee
benefits, environmental remediation, and retiree medical coverage; interest
rates; product mix; sales volumes and selling prices; and the fact that accrued
OPEB expenses will become deductible over an extended period of time and require
the Company to generate significant amounts of future taxable income, the
Company believes the gross deferred tax assets may not currently meet the
"more-likely-than-not" realizability test. As such, during the fourth quarter of
2001, the Company provided a deferred tax asset valuation allowance of
approximately $14.5 million. The resulting net deferred tax asset of
approximately $21.6 million at December 31, 2001 approximated the tax expense
for financial reporting purposes which was recorded during the first quarter of
2002 related to the cancellation of indebtedness income resulting from the
Exchange Offer. As a result of the deferred tax asset valuation allowance, the
Company does not anticipate recognizing a tax benefit associated with its
expected pre-tax losses during 2002 will be appropriate. Accordingly, during the
first six months of 2002, the Company decreased the deferred tax asset valuation
allowance by approximately $400,000. Keystone will continue to review the
recoverability of its deferred tax assets, and based on such periodic reviews,
Keystone could recognize a change in the valuation allowance related to its
deferred tax assets in the future.
Summarized below are (i) the differences between the income tax provision
(benefit) and the amounts that would be expected by applying the U.S. federal
statutory income tax rate of 35% to the income (loss) before income taxes and
cumulative effect of change in accounting principle, and (ii) the components of
the income tax provision (benefit).
Six months ended
June 30,
2001 2002
---- ----
(In thousands)
Expected tax provision (benefit), at statutory rate .... $ (3,178) $ 19,570
U. S. state income taxes, net .......................... (170) 2,471
Amortization of goodwill and negative goodwill ......... (215) --
Deferred tax asset valuation allowance ................. -- (428)
Other, net ............................................. (349) 9
-------- --------
Income tax provision (benefit) ......................... $ (3,912) $ 21,622
======== ========
Comprehensive provision (benefit) for income taxes:
Currently refundable:
U.S. federal ....................................... $ (20) $ (18)
U.S. state ......................................... 84 18
-------- --------
Net currently refundable ......................... 64 --
Deferred income taxes, net ........................... (3,976) 21,622
-------- --------
$ (3,912) $ 21,622
======== ========
Note 6 - Other accrued liabilities:
December 31, June 30,
2001 2002
------ ------
(In thousands)
Current:
Employee benefits .............................. $11,168 $12,398
Self insurance ................................. 8,906 9,095
Environmental .................................. 8,068 7,991
Deferred vendor payments ....................... 2,488 3,304
Legal and professional ......................... 887 1,459
Disposition of former facilities ............... 530 638
Interest ....................................... 1,287 433
Other .......................................... 3,766 6,783
------- -------
$37,100 $42,101
======= =======
Noncurrent:
Deferred vendor payments ....................... $13,648 $11,838
Environmental .................................. 7,508 7,472
Workers compensation payments .................. 1,762 1,890
Interest ....................................... 7,735 --
Other .......................................... 357 373
------- -------
$31,010 $21,573
======= =======
During the first quarter of 2002, two of the Company's major vendors,
representing approximately $16.1 million of trade payables, agreed to be paid
over a five-year period ending in March 2007 with no interest. The repayment of
a portion of such deferred vendor payments could be accelerated if the Company
achieves specified levels of future earnings.
Keystone generally undertakes planned major maintenance activities on an
annual basis, usually in the fourth quarter of each year. These major
maintenance activities are conducted during a shut-down of the Company's steel
and rod mills. Repair and maintenance costs estimated to be incurred in
connection with these planned major maintenance activities are accrued in
advance on a straight-line basis throughout the year and are included in cost of
goods sold.
Note 7 - Operations:
The Company's operations are comprised of two segments; the manufacture and
sale of carbon steel rod, wire and wire products for agricultural, industrial,
construction, commercial, original equipment manufacturers and retail consumer
markets and the distribution of wire, plastic and wood lawn and garden products
to retailers through Garden Zone (a 51% owned subsidiary).
Keystone is also engaged in a scrap recycling joint venture through its 50%
interest in Alter Recycling Company, L.L.C. ("ARC"), an unconsolidated equity
affiliate.
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2001 2002 2001 2002
---- ---- ---- ----
(In thousands)
Revenues:
Steel and wire products ........ $ 82,401 $ 90,892 $ 157,714 $ 172,901
Lawn and garden products ....... 3,893 3,794 6,691 8,134
-------- --------- --------- ---------
86,294 94,686 164,405 181,035
Elimination of intersegment
revenues ..................... -- (442) (348) (879)
-------- --------- --------- ---------
$ 86,294 $ 94,244 $ 164,057 $ 180,156
======== ========= ========= =========
Income (loss) before income taxes
and cumulative effect of change
in accounting principle:
Operating profit (loss):
Steel and wire products ...... $ 712 $ 4,069 $ (2,695) $ 5,939
Lawn and garden products ..... 386 248 464 604
-------- --------- --------- ---------
1,098 4,317 (2,231) 6,543
General corporate items:
Interest income ............ 53 21 124 41
General income
(expense), net ............ (296) (1,267) 373 (1,763)
Gain on early extinguishment
of debt ................... -- -- -- 54,739
Interest expense ............. (3,601) (953) (7,347) (3,647)
-------- --------- --------- ---------
$ (2,746) $ 2,118 $ (9,081) $ 55,913
======== ========= ========= =========
Note 8 - Contingencies:
At June 30, 2002, the Company's financial statements reflected accrued
liabilities of $15.5 million for estimated remedial costs arising from
environmental issues. There is no assurance regarding the ultimate cost of
remedial measures that might eventually be required by environmental authorities
or that additional environmental hazards, requiring further remedial
expenditures, might not be asserted by such authorities or private parties.
Accordingly, the ultimate costs of remedial measures may exceed the amounts
currently accrued.
For additional information related to commitments and contingencies,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Annual Report.
Note 9 - Accounting principles newly adopted in 2002:
Goodwill. Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill, including goodwill arising from the
difference between the cost of an investment accounted for by the equity method
and the amount of the underlying equity in net assets of such equity method
investee ("equity method goodwill"), is not amortized on a periodic basis.
Goodwill (other than equity method goodwill) is subject to an impairment test to
be performed at least on an annual basis, and impairment reviews may result in
future periodic write-downs charged to earnings. Equity method goodwill is not
tested for impairment in accordance with SFAS No. 142; rather, the overall
carrying amount of an equity method investee will continue to be reviewed for
impairment in accordance with existing GAAP. There is currently no equity method
goodwill associated with any of the Company's equity method investees. Under the
transition provisions of SFAS No. 142, all goodwill existing as of June 30, 2001
ceased to be periodically amortized as of January 1, 2002. Also, in connection
with the adoption of SFAS No. 142, negative goodwill of approximately $20.0
million recorded at December 31, 2001 was eliminated as a cumulative effect of
change in accounting principle as of January 1, 2002.
The Company has assigned its goodwill to the reporting unit (as that
term is defined in SFAS No. 142) consisting of Engineered Wire Products, Inc.
("EWP"). Under SFAS No. 142, such goodwill is deemed to not be impaired if the
estimated fair value of EWP exceeds the net carrying value of EWP, including the
allocated goodwill. If the fair value of EWP is less than the carrying value,
then a goodwill impairment loss is recognized equal to the excess, if any, of
the net carrying value of the reporting unit goodwill over its implied fair
value (up to a maximum impairment equal to the carrying of goodwill). The
implied fair value of EWP goodwill is the amount equal to the excess of the
estimated fair value of EWP over the amount that would be allocated to the
tangible and intangible net assets of EWP (including unrecognized intangible
assets) as if such reporting unit had been acquired in a purchase business
combination accounted for in accordance with SFAS No. 141. The Company will use
appropriate valuation techniques, such as discounted cash flows, to estimate the
fair value of EWP.
The Company has completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairment
was deemed to exist. In accordance with requirements of SFAS No. 142, the
Company will review goodwill for impairment during the third quarter of each
year starting in 2002. Goodwill will also be reviewed for impairment at other
times during each year when events or changes in circumstances indicate an
impairment might be present.
As shown in the following table, the Company would have reported a net loss
of $1.9 million, or $.19 per basic share, for the 2001 second quarter and a net
loss of $5.9 million, or $.59 per basic share, during the six months ended June
30, 2001, if the goodwill and negative goodwill amortization included in the
Company's net loss, as reported, had not been recognized.
Three months ended Six months ended
June 30, June 30,
------------------ ---------------
2001 2002 2001 2002
---- ---- ---- ----
(In thousands, except per share data)
Income (loss)
available for common shares ............. $ (1,628) $ 291 $ (5,334) $ 52,302
Adjustments:
Goodwill amortization .................. -- --
31 63
Negative goodwill amortization
(339) -- (678) --
---------- ---------- ---------- ----------
Adjusted income (loss) before
cumulative effect of change in
accounting principle
$ (1,936) $ 291 $ (5,949) $ 52,302
========== ========== ========== ==========
Basic earnings (loss) per
share available for common shares
before cumulative effect of change
in accounting principle as reported
$ (.16) $ .03 $ (.53) $ 3.21
Adjustments:
Goodwill amortization .................. -- --
-- .01
Negative goodwill amortization
(.03) -- (.07) --
---------- ---------- ---------- ----------
Adjusted basic earnings (loss)
per share available for common
shares before cumulative effect
of change in accounting principle ... $ (.19) $ .03 $ (.59) $ 3.21
========== ========== ========== ==========
Diluted earnings (loss) per share
available for common shares before
cumulative effect of change in
accounting principle as reported ........ $ (.16) $ .03 $ (.53) $ 1.94
Adjustments:
Goodwill amortization .................. -- --
-- .01
Negative goodwill amortization
(.03) -- (.07) --
---------- ---------- ---------- ----------
Adjusted diluted earnings (loss)
per share available for common shares
before cumulative effect of change
in accounting principle ............. $ (.19) $ .03 $ (.59) $ 1.94
========== ========== ========== ==========
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2001 2002 2001 2002
---- ---- ---- ----
(In thousands, except per share data)
Net income (loss) as reported ....... $ (1,628) $ 2,004 $ (5,334) $ 54,015
Adjustments:
Goodwill amortization ............. --
31 63 --
Negative goodwill amortization .... --
(339) (678) --
Cumulative effect of change in
accounting principle
-- -- -- (19,998)
---------- ---------- ---------- ----------
Adjusted net income (loss)
$ (1,936) $ 2,004 $ (5,949) $ 34,017
========== ========== ========== ==========
Basic earnings (loss) per
share available for common shares as
reported ........................... $ (.16) $ .03 $ (.53) $ 5.20
Adjustments:
Goodwill amortization ............. -- -- .01 --
Negative goodwill amortization .... (.03) -- (.07) --
Cumulative effect of change in
accounting principle ............. -- -- -- (1.99)
---------- ---------- ---------- ----------
Adjusted basic earnings
(loss) per share available for
common shares .................. $ (.19) .03 $ (.59) $ 3.21
========== ========== ========== ==========
Diluted earnings (loss) per
share available for common shares as
reported ........................... $ (.16) $ .03 (.53) 3.09
Adjustments:
Goodwill amortization ............. -- -- .01 --
Negative goodwill amortization .... (.03) -- (.07) --
Cumulative effect of change in
accounting principle ............. -- -- -- (1.15)
---------- ---------- ---------- ----------
Adjusted diluted earnings
(loss) per share available for
common shares .................. $ (.19) .03 $ (.59) $ 1.94
========== ========== ========== ==========
Impairment of long-lived assets. The Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of existing
GAAP with respect to the recognition and measurement of long-lived asset
impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS
No. 144 provides new guidance intended to address certain implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used to determine whether recognition of any
long-lived asset impairment is required, and if required how to measure the
amount of the impairment. SFAS No. 144 also requires that any net assets to be
disposed of by sale to be reported at the lower of carrying value or fair value
less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. Adoption of SFAS No. 144 did
not have a significant effect on the Company as of January 1, 2002.
Gain or loss on early extinguishment of debt. The Company adopted SFAS No.
145 effective April 1, 2002. SFAS No. 145, among other things, eliminated the
prior requirement that all gains and losses from the early extinguishment of
debt be classified as an extraordinary item. Upon adoption of SFAS No. 145,
gains and losses from the early extinguishment of debt are now classified as an
extraordinary item only if they meet the "unusual and infrequent" criteria
contained in Accounting Principles Bulletin ("APBO") No. 30. In addition, upon
adoption of SFAS No. 145, all gains and losses from the early extinguishment of
debt that had been classified as an extraordinary item are to be reassessed to
determine if they would have met the "unusual and infrequent" criteria of APBO
No. 30; any such gain or loss that would not have met the APBO No. 30 criteria
are retroactively reclassified and reported as a component of income before
extraordinary item. The Company has concluded that its 2002 first quarter $54.7
million pre-tax extraordinary gain ($33.1 million, or $3.29 per basic share, net
of income taxes) discussed in Note 3 would not have met the APBO No. 30 criteria
for classification as an extraordinary item, and accordingly such gain has been
retroactively reclassified and is now reported as a component of income before
extraordinary item.
Note 10 - Earnings per share:
Net income (loss) per share is based upon the weighted average number of
common shares and dilutive securities. A reconciliation of the numerators and
denominators used in the calculations of basic and diluted earnings per share
computations of income (loss) before cumulative effect of change in accounting
principle is presented below. The effect of the assumed conversion of the Series
A Convertible Preferred Stock was antidilutive in the three months ended June
30, 2002 period. The dilutive effect of the assumed conversion of the Series A
Preferred Stock in the six month ended June 30, 2002 period is calculated from
its issuance in March 2002. Keystone stock options were omitted from the
calculation because they were antidilutive in all periods presented.
Three months ended Six months ended
June 30, June 30,
---------------- ----------------
2001 2002 2001 2002
---- ---- ---- ----
(In thousands)
Numerator:
Net income (loss) before cumulative
effect of change in accounting
principle ......................... $ (1,628) $ 2,004 $ (5,334) $ 34,017
Less Series A Preferred Stock
Dividends ......................... -- (1,713) -- (1,713)
-------- -------- -------- --------
Basic net income (loss) before
cumulative effect of change in
accounting principle .............. (1,628) 291 (5,334) 32,304
Series A Preferred Stock dividends -- -- 1,713
-------- -------- -------- --------
Diluted net income (loss) before
cumulative effect of change in
accounting principle .............. $ (1,628) $ 291 $ (5,334) $ 34,017
======== ======== ======== ========
Denominator:
Average common shares outstanding .. 10,062 10,068 10,062 10,066
Dilutive effect of Preferred Stock
Series A .......................... -- -- -- 7,425
-------- -------- -------- --------
Diluted shares ..................... 10,062 10,068 10,062 17,491
======== ======== ======== ========
Note 11 - Accounting principle not yet adopted:
The Company will adopt SFAS No. 143, Accounting for Asset Retirement
Obligations, no later than January 1, 2003. Under SFAS No. 143, the fair value
of a liability for an asset retirement obligation covered under the scope of
SFAS No. 143 would be recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is still studying this standard to determine, among other things,
whether it has any asset retirement obligations which are covered under the
scope of SFAS No. 143, and the effect, if any, to the Company of adopting SFAS
No. 143 has not yet been determined.
The Company will adopt SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, no later than January 1, 2003 for exit or disposal
activities initiated on or after the date of adoption. Under SFAS No. 146, costs
associated with exit activities, as defined, that are covered by the scope of
SFAS No. 146 will be recognized and measured initially at fair value, generally
in the period in which the liability is incurred. Costs covered by the scope of
SFAS No. 146 include termination benefits provided to employees, costs to
consolidate facilities or relocate employees, and costs to terminate contracts
(other than a capital lease). Under existing GAAP, a liability for such an exit
cost is recognized at the date an exit plan is adopted, which may or may not be
the date at which the liability has been incurred.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
Keystone believes it is a leading manufacturer of fabricated wire products,
industrial wire and carbon steel rod for the agricultural, industrial,
construction, original equipment manufacturer and retail consumer markets.
Historically, the Company has experienced greater sales and profits during the
first half of the year due to the seasonality of sales in principal wire
products markets, including the agricultural and construction markets. Keystone
is also engaged in the distribution of wire, plastic and wood lawn and garden
products to retailers through Garden Zone and in scrap recycling through ARC.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
including, but not limited to, statements found in this "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations," are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes", "intends", "may", "should",
"could", "anticipates," "expected" or comparable terminology, or by discussions
of strategies or trends. Although Keystone believes the expectations reflected
in such forward-looking statements are reasonable, it cannot give any assurances
that these expectations will prove to be correct. Such statements by their
nature involve substantial risks and uncertainties that could significantly
impact expected results, and actual future results could differ materially from
those described in such forward-looking statements. While it is not possible to
identify all factors, Keystone continues to face many risks and uncertainties.
Among the factors that could cause actual future results to differ materially
are the risks and uncertainties discussed in this Quarterly Report and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission including, but not limited to, future supply and demand
for the Company's products (including cyclicality thereof), customer inventory
levels, changes in raw material and other operating costs (such as scrap and
energy) general economic conditions, competitive products and substitute
products, customer and competitor strategies, the impact of pricing and
production decisions, the possibility of labor disruptions, environmental
matters (such as those requiring emission and discharge standards for existing
and new facilities), government regulations and possible changes therein, any
significant increases in the cost of providing medical coverage to employees and
retirees, the ultimate resolution of pending litigation, successful
implementation of the Company's capital improvements plan, international trade
policies of the United States and certain foreign countries, and any possible
future litigation and other risks and uncertainties as discussed in this
Quarterly Report and the Annual Report, including, without limitation, the
section referenced above. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should the underlying assumptions
prove incorrect, actual results could differ materially from those forecasted or
expected. Keystone disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
The following table sets forth Keystone's billet and wire rod production,
scrap costs sales volume and pricing data for the periods indicated. The per-ton
selling prices shown reflect the average price of all grades of all products
sold to all customers in each product category.
Three months ended Six months ended
June 30, June 30,
-------------- ---------------
2001 2002 2001 2002
---- ---- ---- ----
(Tons in thousands)
Production volume (tons):
Billets ............................... 189 209 352 384
Wire rod .............................. 186 192 336 374
Average per-ton scrap
purchase cost ......................... $ 85 $ 93 $ 87 $ 88
Sales volume(tons):
Fabricated wire products .............. 82 85 153 159
Industrial wire ....................... 27 28 54 52
Wire rod .............................. 68 80 132 162
---- ---- ---- ----
177 193 339 373
==== ==== ==== ====
Per-ton selling prices:
Fabricated wire products ............. $646 $660 $657 $661
Industrial wire ...................... $421 $420 $426 $421
Wire rod ............................. $257 $286 $254 $277
All steel and wire products .......... $463 $469 $463 $461
The following table sets forth the components of the Company's net sales
for the periods indicated.
Three months ended Six months ended
June 30, June 30,
---------------- ----------------
2001 2002 2001 2002
---- ---- ---- ----
(In millions)
Steel and wire products:
Fabricated wire products .......... $ 53.3 $ 56.0 $100.8 $105.4
Industrial wire ................... 11.2 11.5 22.6 22.1
Wire rod .......................... 17.5 23.0 33.7 44.8
Other ............................. .5 .4 .7 .6
------ ------ ------ ------
82.5 90.9 157.8 172.9
Lawn and garden products ............ 3.8 3.3 6.3 7.3
------ ------ ------ ------
$ 86.3 $ 94.2 $164.1 $180.2
====== ====== ====== ======
The following table sets forth selected operating data of the Company as a
percentage of net sales for the periods indicated.
Three months ended Six months ended
June 30, June 30,
2001 2002 2001 2002
---- ---- ---- ----
Net sales .......................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold ................. 93.2 88.5 95.6 89.2
------- ------- ------- -------
Gross profit ....................... 6.8 % 11.5 % 4.4 % 10.8 %
======= ======= ======= =======
Selling expense .................... 1.9 % 1.8 % 2.0 % 2.0 %
General and administrative expense . 5.2 % 7.2 % 4.8 % 7.1 %
Overfunded defined benefit pension
Credit ............................ (.9)% (.8)% (.9)% (.8)%
Gain on early extinguishment of
Debt .............................. - % - % - % (30.4)%
Income (loss) before income taxes
and cumulative effect of change in
accounting principle .............. (3.2)% 2.2 % (5.5)% 31.0 %
Income tax provision (benefit) ..... (1.5) -- (2.3) 12.0 %
Minority interest in after-tax
Earnings ......................... .2 .1 .1 .1
------- ------- ------- -------
Net income (loss) before cumulative
effect of change in accounting
principle ......................... (1.9)% 2.1 % (3.3)% 18.9 %
======= ======= ======= =======
Net sales of $94.2 million in the 2002 second quarter were up 9% from $86.3
million during the same period in 2001. This increase in sales was due primarily
to a 9% increase in shipments of the Company's steel and wire products combined
with a $6 per-ton increase in overall steel and wire product selling prices,
partially offset by a decline in Garden Zone's sales. Garden Zone's sales during
the 2002 second quarter declined $500,000 from the 2001 second quarter to $3.3
million. Shipments of wire rod increased 18% during the 2002 second quarter as
compared to the 2001 second quarter while per-ton selling prices increased 11%.
Industrial wire shipments increased 4% while per-ton selling prices remained
relatively constant. Fabricated wire products shipments during the 2002 second
quarter increased 3% as compared to the 2001 second quarter while per-ton
selling prices increased 2%. Management believes the increase in shipment volume
during the 2002 second quarter was due to abnormally low shipment volume in the
2001 second quarter resulting from high levels of imported steel and wire
products. The 2002 second quarter shipment volume was consistent with those
levels in years prior to 2001. Although high levels of imported steel and wire
products continues, these import levels have been somewhat mitigated by former
competitors of the Company exiting the marketplace. However, despite this
decline in competition, Keystone has still been unable to achieve historic
levels of per-ton selling prices.
Net sales of $180.2 million in the first six months of 2002 were up 10%
from $164.1 million in the first six months of 2001. This increase in sales was
primarily due to a 10% increase in shipments of Keystone's steel and wire
products and a $900,000 increase in Garden Zone's sales partially offset by a $2
per-ton decline in selling prices of the Company's steel and wire products
during the first six months of 2002. Garden Zone's sales during the first six
months of 2002 amounted to $7.3 million as compared to $6.3 million during the
same period in 2001. Wire rod shipments during the first six months of 2002
increased 22% over the first six months of 2001 while per-ton selling prices
increased 9%. Industrial wire shipments declined 1% while per-ton selling prices
declined 1%. Fabricated wire products shipments during the first six months of
2002 increased 4% as compared to the first six months of 2001 while per-ton
selling prices increased 1%. Despite increases in per-ton selling prices of wire
rod and fabricated wire products, overall per-ton selling prices declined as a
result of a change in the product mix between the first six months of 2001 and
2002. Management believes the increase in shipment volume during the first six
months of 2002 was also due to abnormally low shipment volume during the first
six months of 2001. The shipment volume during the first six months of 2002 was
consistent with those levels in years prior to 2001.
Billet production during the second quarter of 2002 increased 20,000 tons
or 10% to 209,000 tons from 189,000 tons during the second quarter of 2001. The
primary reason for the higher production levels during the 2002 second quarter
was improved performance from Keystone's steel mill. Keystone did not purchase
any billets during the second quarter of either 2001 and 2002. Wire rod
production during the second quarter of 2002 increased to 192,000 tons as
compared to production of 186,000 tons in the 2001 second quarter, primarily as
a result of the higher billet production during the 2002 second quarter.
The increased billet production during the first and second quarters of
2002 as compared to the first two quarters of 2001 resulted in billet production
during the first six months of 2002 increasing 32,000 tons to 384,000 tons from
352,000 tons during the first six months of 2001. Keystone did not purchase any
billets during the first six months of either 2001 or 2002. Increased wire rod
production during the first quarter of 2002 as compared to the 2001 first
quarter resulted in an increase of 38,000 tons of wire rod produced during the
first six months of 2002 to 374,000 tons from 336,000 tons during the first six
months of 2001. The low wire rod production during the first quarter of 2001 was
due primarily to intentional production curtailments designed to avoid using
high cost natural gas and to allow billet inventories to build in anticipation
of planned outages for repair and maintenance projects in the steel mill during
that quarter.
Gross profit during the 2002 second quarter increased to $10.8 million from
$5.8 million in the 2001 second quarter as the Company's gross margin increased
from 6.8% in the 2001 period to 11.5% in the 2002 second quarter. This increase
in gross margin was due primarily to the higher per-ton steel and wire product
selling prices, increased production efficiencies in the Company's steel mill
and lower natural gas costs partially offset by higher costs for scrap steel,
Keystone's primary raw material, and electricity. The higher selling prices and
lower gas costs during the 2002 second quarter favorably impacted gross profit
by $1.2 million and $800,000, respectively, whereas higher scrap and electricity
costs negatively impacted gross profit by $1.8 million and $1.7 million,
respectively. In addition, during the 2002 second quarter, Keystone received
$400,000 of insurance proceeds from business interruption policies related to
incidents in prior years as compared to none received during the 2001 second
quarter.
Gross profit during the first six months of 2002 increased to $19.5 million
from $7.2 million in the first six months of 2001 as the Company's gross margin
increased from 4.4% in the 2001 period to 10.8% in the first six months of 2002.
This increase in gross margin was due primarily to increased production
efficiencies in the Company's steel mill and lower natural gas costs partially
offset by the lower steel and wire product selling prices and higher costs for
electricity and scrap steel. The lower natural gas costs during the first half
of 2002 favorably impacted gross profit by $3.8 million, whereas higher
electricity and scrap costs negatively impacted gross profit by $3.4 million and
$400,000, respectively. The lower selling prices adversely impacted gross profit
during the first six months of 2002 by approximately $900,000. In addition,
during the first six months of 2002, Keystone received $800,000 of insurance
proceeds from business interruption policies related to incidents in prior years
as compared to $1.6 million received during the first six months of 2001. During
the first six months of 2001, Keystone experienced certain production outages
that adversely impacted gross profit by approximately $800,000. Keystone did not
experience any such production outages during the first six months of 2002.
Selling expense was $1.7 million during the second quarter of both 2002 and
2001. Selling expense of $3.6 million during the first six months of 2002 was
approximately $300,000 higher than the same period in 2001, but was constant as
a percentage of sales.
General and administrative expense increased to $6.8 million during the
second quarter of 2002 as compared to $4.5 million during the second quarter of
2001 primarily due to higher legal and professional and OPEB expenses in the
second quarter of 2002 partially offset by an unfavorable legal settlement of
$500,000 during the second quarter of 2001. General and administrative expense
increased from $7.8 million during the first half of 2001 to $12.7 million
during the first half of 2002, primarily due to higher legal and professional
and OPEB expenses in the first half of 2002 as well as a $650,000 reimbursement
of legal fees received during the first half of 2001 all partially offset by the
unfavorable legal settlement during the first half of 2001. The higher legal and
professional expenses during the first half of 2002 were primarily related to
the Exchange Offer described below.
The overfunded defined benefit pension credit in the second quarter of both
2001 and 2002 was $750,000 and during the first six months of both 2001 and 2002
was $1.5 million. Keystone currently anticipates the total 2002 overfunded
defined benefit pension credit will approximate $3.0 million as compared to a
total credit in 2001 of $5.5 million.
Interest expense in the second quarter of 2002 was lower than the second
quarter of 2001 due principally to lower debt levels and interest rates. Average
borrowings by Keystone approximated $97.1 million in the second quarter of 2002
as compared to $152.2 million in the second quarter of 2001. During the second
quarter of 2002, Keystone's weighted-average interest rate was 3.0% per annum as
compared to 8.9% per annum in the second quarter of 2001.
Interest expense in the first half of 2002 was also lower than the first
half of 2001 due principally to lower debt levels and interest rates. Average
borrowings by Keystone approximated $116.5 million in the first half of 2002 as
compared to $151.1 million in the first half of 2001. During the first half of
2002, Keystone's weighted-average interest rate was 5.8% per annum as compared
to 9.2% per annum in the first half of 2001.
The principal reasons for the difference between the U.S. federal statutory
income tax rate and the Company's effective income tax rates are explained in
Note 5 to the Consolidated Financial Statements. At June 30, 2002, the Company
had recorded a deferred tax asset valuation allowance of $14.1 million resulting
in no net deferred tax assets. Keystone periodically reviews the recoverability
of its deferred tax assets to determine whether such assets meet the
"more-likely-than-not" recognition criteria. The Company will continue to review
the recoverability of its deferred tax assets, and based on such periodic
reviews, Keystone could recognize a change in the recorded valuation allowance
related to its deferred tax assets in the future. As a result of the deferred
tax asset valuation allowance, other than the tax provision recorded in
connection with the Exchange Offer described below, the Company does not
anticipate recording a tax benefit associated with its expected pre-tax losses
during 2002 will be appropriate.
In the first quarter of 2002, the Company completed an exchange offer
related to its 9 5/8% Notes whereby 94% of the holders of the 9 5/8% Notes,
exchanged their notes for either a discounted cash amount and common stock, new
preferred equity and subordinated secured debt securities, or subordinated
unsecured debt securities (the "Exchange Offer"). As a result of the Exchange
Offer, for financial reporting purposes the Company reported a $54.7 million
pre-tax gain ($33.1 million net of income taxes). See Note 3 to Consolidated
Financial Statements.
During the 2002 first quarter, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. As
a result of adopting SFAS No. 142, negative goodwill of approximately $20.0
million recorded at January 1, 2002 was eliminated as a cumulative effect of
change in accounting principle at that date. See Note 9 to Consolidated
Financial Statements.
As a result of the items discussed above, Keystone recorded net income
during the second quarter of 2002 of $2.0 million as compared to a net loss of
$1.6 million in the second quarter of 2001, and net income during the first half
of 2002 of $54.0 million as compared to a net loss in the first half of 2000 of
$5.3 million.
Outlook for 2002
Management currently believes, despite the current level of rod imports,
capacity utilization and shipment volumes in 2002 will only be slightly higher
than 2001 levels and average per-ton selling prices for the 2002 year will
approximate those of the fourth quarter of 2001. In addition, management
currently anticipates the effect of higher energy and OPEB costs, a lower
pension credit, offset in part by lower interest costs, will result in Keystone
recording a loss before income taxes (exclusive of non-recurring effects of the
Exchange Offer) for calendar 2002, although the pre-tax loss is expected to
significantly decline in 2002 as compared to the 2001 level.
Accounting principle not yet adopted
See Note 10 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's cash flows from operating activities are affected by the
seasonality of its business as sales of certain products used in the
agricultural and construction industries are typically highest during the second
quarter and lowest during the fourth quarter of each year. These seasonal
fluctuations impact the timing of production, sales and purchases and have
typically resulted in a use of cash from operations and increases in the
outstanding balance under the Company's revolving credit facilities during the
first quarter of each year.
At June 30, 2002 Keystone had negative working capital of $23.6 million,
including $2.6 of notes payable and current maturities of long-term debt as well
as outstanding borrowings under the Company's revolving credit facilities of
$29.8 million. The amount of available borrowings under these revolving credit
facilities is based on formula-determined amounts of trade receivables and
inventories, less the amount of outstanding letters of credit. At June 30, 2002,
unused credit available for borrowing under Keystone's $45 million revolving
credit facility (the "Keystone Revolver"), which expires March 31, 2005, EWP's
$7 million revolving credit facility, which expires June 30, 2004, (the "EWP
Revolver") and Garden Zone's $4 million revolving credit facility, which expires
April 2, 2003 (as amended in July 2002) were $16.6 million, $4.1 million and
$2.3 million, respectively. The Keystone Revolver requires daily cash receipts
be used to reduce outstanding borrowings, which results in the Company
maintaining zero cash balances when there are balances outstanding under this
credit facility. A wholly-owned subsidiary of Contran has agreed to loan
Keystone up to an aggregate of $6 million under the terms of a revolving credit
facility that matures on December 31, 2002. Through August 14, 2002, the Company
had not borrowed any amounts under such facility.
In addition, in connection with the Exchange Offer, during the first
quarter of 2002, two of the Company's major vendors agreed to a five-year
non-interest bearing repayment of their past due balances which aggregated $16.1
million at the completion of the Exchange Offer.
During the first half of 2002, the Company's operating activities provided
approximately $5.5 million of cash compared to $7.3 million used in operations
in the first half of 2001 due primarily to a greater decline in accounts
receivable and a greater increase in accrued expenses.
During the first half of 2002, Keystone made capital expenditures of $3.3
million as compared to $1.5 million in the first half of 2001. During 2001 and
the first quarter of 2002, Keystone deferred capital expenditures, including
maintenance items, due to liquidity constraints although many of these items
cannot be deferred indefinitely. Capital expenditures for calendar year 2002 are
currently estimated to be approximately $10 million and are related primarily to
upgrades of production equipment. Keystone currently anticipates these capital
expenditures will be funded using cash flows from operations together with
borrowing availability under the Company's existing credit facilities.
At June 30, 2002, the Company's financial statements reflected accrued
liabilities of $15.5 million for estimated remediation costs for those
environmental matters which Keystone believes are reasonably estimable. Although
the Company has established an accrual for estimated future required
environmental remediation costs, there is no assurance regarding the ultimate
cost of remedial measures that might eventually be required by environmental
authorities or that additional environmental hazards, requiring further remedial
expenditures, might not be asserted by such authorities or private parties.
Accordingly, the costs of remedial measures may exceed the amounts accrued.
Keystone believes it is not possible to estimate the range of costs for certain
sites. The upper end of range of reasonably possible costs to Keystone for sites
for which the Company believes it is possible to estimate costs is $21.5
million.
The Company periodically reviews the recoverability of its deferred tax
assets to determine whether such assets meet the "more-likely-than-not"
recognition criteria. At June 30, 2002, the Company expects that its long-term
profitability should ultimately be sufficient to enable it to realize full
benefit of its future tax deductions. Although, considering all factors believed
to be relevant, including the Company's recent operating results, its expected
future near-term productivity rates; cost of raw materials, electricity, labor
and employee benefits, environmental remediation, and retiree medical coverage;
interest rates; product mix; sales volumes and selling prices and the fact that
accrued OPEB expenses will become deductible over an extended period of time and
require the Company to generate significant amounts of future taxable income,
the Company believes the gross deferred tax assets may not currently meet the
"more-likely-than-not" realizability test. As such, the Company has a deferred
tax asset valuation allowance of approximately $14.1 million. The Company will
continue to review the recoverability of its deferred tax assets, and based on
such periodic reviews, the Company could change the valuation allowance related
to its deferred tax assets in the future.
Keystone incurs significant ongoing costs for plant and equipment and
substantial employee medical benefits for both current and retired employees. As
such, Keystone is vulnerable to business downturns and increases in costs, and
accordingly, routinely compares its liquidity requirements and capital needs
against its estimated future operating cash flows. In addition to planned
reductions in fixed costs and announced increases in certain product selling
prices, Keystone is taking additional action towards improving its liquidity.
These actions include, but are not limited to, reducing inventory levels through
more efficient production schedules and modifying coverages and participant
contribution levels of medical plans for both employees and retirees. Keystone
has also considered, and may in the future consider, the sale of certain
divisions or subsidiaries that are not necessary to achieve the Company's
long-term business objectives. However, there can be no assurance Keystone will
be successful in any of these or other efforts, or that if successful, they will
provide sufficient liquidity for the Company's operations during the next year.
Management currently believes cash flows from operations together with
funds available under the Company's credit facilities will be sufficient to fund
the anticipated needs of the Company's operations and capital improvements for
the year ending December 31, 2002. This belief is based upon management's
assessment of various financial and operational factors, including, but not
limited to, assumptions relating to product shipments, product mix and selling
prices, production schedules, productivity rates, raw materials, electricity,
labor, employee benefits and other fixed and variable costs, interest rates,
repayments of long-term debt, capital expenditures, and available borrowings
under the Company's credit facilities. However, there are many factors that
could cause actual future results to differ materially from management's current
assessment. While it is not possible to identify all factors, Keystone continues
to face many risks and uncertainties. Among the factors that could cause actual
future results to differ materially are the risks and uncertainties discussed in
this Quarterly Report and those described from time to time in the Company's
other filings with the Securities and Exchange Commission, including, but not
limited to, future supply and demand for the Company's products (including
cyclicality thereof), customer inventory levels, changes in raw material and
other operating costs (such as scrap and energy), general economic conditions,
competitive products and substitute products, customer and competitor
strategies, the impact of pricing and production decisions, the possibility of
labor disruptions, environmental matters (such as those requiring emission and
discharge standards for existing and new facilities), government regulations and
possible changes therein, any significant increases in the cost of providing
medical coverage to active and retired employees, the ultimate resolution of
pending litigation, international trade policies of the United States and
certain foreign countries and any possible future litigation and other risks and
uncertainties as discussed in this Quarterly Report. Should one or more of these
risks materialize (or the consequences of such a development worsen), or should
the underlying assumptions prove incorrect, actual results could differ
materially from those forecasted or expected and as a result, could have a
material adverse effect on the future liquidity, financial condition and results
of operations of the Company. Additionally, significant declines in the
Company's end-user markets or market share, the inability to maintain
satisfactory billet and wire rod production levels, or other unanticipated
costs, if significant, could result in a need for funds greater than the Company
currently has available. There can be no assurance the Company would be able to
obtain an adequate amount of additional financing. See Notes 12 and 14 to the
Consolidated Financial Statements in the Annual Report.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to disclosure provided under the caption "Current
litigation" in Note 14 to the Consolidated Financial Statements included in the
Annual Report.
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 16, 2002, the annual meeting of the stockholders of Keystone was
held for the purpose of voting to elect one director for a term of two years and
two directors for terms of three years.
Results of voting at the annual meeting are detailed below (10,068,450
common shares were entitled to vote at the meeting).
For Withheld Total
Director -
Two-year term
J. Walter Tucker, Jr ............. 9,157,749 102,186 9,259,935
Three-year term
Glenn R. Simmons ................. 9,181,704 78,231 9,259,935
Steven L. Watson ................. 9,182,796 77,139 9,259,935
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is included herein:
99.1 Chief Executive Officer's Certification Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer's Certification Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K filed during the quarter ended June 30, 2002:
None.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Keystone Consolidated Industries, Inc.
--------------------------------------
(Registrant)
Date: August 14, 2002 By /s/Bert E. Downing, Jr.
-------------------------------------
Bert E. Downing, Jr.
Vice President and Corporate Controller
(Principal Financial and Accounting
Officer)